Posted on: 3rd January 2017
Those who have exceeded their lifetime and or annual allowance and may want to consider Venture Capital Trust’s (VCT’s) as an option to benefit from the tax relief. However, it’s important to understand what exactly you’re looking at in Venture Capital Trusts, before making the decision to invest.
VCTs are listed companies operated by fund managers, who invest in smaller and newer businesses that aren’t public floated on stock exchanges. A VCT has the potential to represent an attractive prospect for anyone interested in raking in potentially high returns, with equally elevated risks. In addition, these higher-risk funds are eligible for significant tax relief, though anyone taking part must accept that they may get back less than they invest…as is the case withprospects across the board.
How It Works
The idea of a VCT revolves around making targeted investments in smaller businesses, in order to generate higher returns. Quite the opposite of standard investments that generally focus on larger, more established companies, VCTs are all about investing in smaller business that need investors to help them grow, evolve and develop. As the businesses are smaller in size and newer in nature, the risks of investing in money in them are higher. But at the same time, as smaller businesses grow exponentially faster than larger businesses, potential returns for investors can be much higher.
A full breakdown on the rules and regulations with regard to how VCTs can be used can be found by accessing the official HM Revenue & Customs guidelines on Venture Capital Trusts.
As the government actively encouragesin smaller businesses for the welfare of the British economy in general, VCTs carry tax relief as an incentive to get involved. You pool your own investments with those of any number of other clients also investing in VCTs, making it possible to spread your investments over multiple companies and better-control risks accordingly.
Income tax relief at a rate of 30% is available on newly issued VCTs up to a maximumamount of £200,000 per tax year. However, you need to hold onto your shares in any chosen VCT for a minimum of five years to qualify for the tax relief. If you choose to sell them earlier, you will not be eligible for any tax relief. However, no Capital Gains Tax is payable on any profits when selling VCT shares, regardless of how soon after you purchase them you decide to sell them.
As you’re able to sell your shares at any time, you can access your money at any time you like after buying the shares. But along with forfeiting tax relief, selling early can be a tricky task in its own right as the market for eligible buyers is much smaller when it comes to VCTs sold at an early stage. While there’s no specific guarantee as to whether the value of your shares will go up or down, your fund manager may be covered by the Financial Services Compensation Scheme. In which case, compensation is available if the manager goes bust up to a maximum value of £50,000 per person per institution.
VCTs are a classic example of balancing higher-risk with potentially high rewards, though with the added bonus of tax relief after five years.